Buy Coal India Ltd For Target Rs.401.00 - Motilal Oswal

Commercial coal mining policy cleared Long way before any meaningful contribution; Maintain Buy on Coal India The Cabinet Committee on Economic Affairs, on 20th February 2018, cleared the policy on commercial coal mining in India, opening up the sector for private participation. Mines will be allocated through a transparent bidding process, with the highest bidder securing the rights. The bid price will go to the respective state government. Finer details, however, are awaited.

Private sector ownership of coal mines is not new in India. Between 1993 and 2011, more than 200 coal mines were allocated to private sector for captive mining. Unfortunately, the exercise met with limited success. In 2014 (before these mines were cancelled by a Supreme Court order), the output from these mines was just ~50mt. Even the re-auctioned coal blocks (in 2015 and 2016) have failed to generate the targeted output due to issues related to land acquisition, clearances, infrastructure and manpower. For commercial mining to succeed, a co-ordinated approach among various government agencies is a must to ensure clearances and approvals are fast-tracked. Smaller mines will have to be clubbed to ensure economies of scale are available. Manpower availability could also be constrained, given Coal India and SCCL also have aggressive plans to ramp-up production, while the existing captive coal miners will also be looking to add capacities.

We do not expect any meaningful contribution from commercial mines over the medium term. Assuming the mines are offered over the next 1-2 years, it will take a few years to have land, clearances and infrastructure in place (in a captive coal mine auction, the government allows 3-4 years of this) and some more years for the ramp-up. Competitiveness of private miners will depend on the price offered to secure the mining rights and the type of mines offered (stripping ratio, geology, grade, access to infrastructure). While on a like-to-like basis, Coal India could be uncompetitive to private miners due to its legacy cost, but it has the advantage (unlike private miners) of not needing to pay for mining rights.

Long way before any meaningful contribution; Maintain Buy on Coal India

We believe COAL will continue being the key to electricity generation growth in India, given that solar power (an alternative) has issues with variability and is capped by land availability. We thus believe COAL could achieve 6-7% volume growth. Concerns about grade slippage and wage hikes are now behind. The move to GCV-based pricing is unlikely to impact margins, in our view. Volume growth, operating leverage, closure of unviable underground mines and high natural attrition are the key drivers of earnings. We expect 30% earnings CAGR over FY18- 20. Valuations are attractive at 5.6x FY20E EV/EBITDA and 5-8% dividend yield. We value the stock at INR401/share, based on 7.5x FY20E EV/EBITDA. Maintain Buy.

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